Supply Chain Management (Laburnum Case Study)
12Laburnum Case Study
Laburnum Group has grown to be one of the largest listed companies in Australia. The organisation has a diverse business portfolios ranging from home improvement, office supplies, chemicals, energy, industrial and safety products, and clothing. The report is based on energy and clothing portfolio which are the largest business units at Laburnum Group. The energy and clothing portfolios have been facing inefficiencies and challenges. These challenges have been attributed to procurement and supply chain management decisions. The report starts by analysing Sapphire Energy and analyses the ordering of the current ordering system and comes up with an improvement. The second part of the report have analysed AusCotton and addressed the challenges in strategic sourcing, less than perfect demand forecasts and looks at the areas for improvement. The report also addresses the claims on contract manufacturers producing illegal merchandise competing with branded merchandise at AusCotton.
Table of Contents
Executive summary 2
Sapphire Energy 4
Current ordering system and how to improve it 4
Major global issues in the areas of strategic sourcing 6
Impacts of less-than-perfect demand forecasts for AusCotton products 7
Strategic sourcing process elements and justification 7
Production of illegal merchandise competing with the branded merchandise of AusCotton 8
Laburnum group is one of Australia largest listed companies with diverse business portfolios. The firm has a wide business portfolio which makes it vital to constantly monitor their corporate strategy decisions. The energy and clothing portfolios have been having the largest share of the overall business. These portfolios have been facing inefficiencies and challenges which make it vital to examine the current systems, processes and strategies across the different product strategies. Based on the recent assessment on their clothing and energy business, the main source of inefficiencies is based on supply chain management decisions. As the new inventory controller at Sapphire energy, this report will evaluate the effectiveness of the current ordering system and give recommendations on how it can be improved. The second part of the report will help address some of the procurement and supply chain issues facing AusCotton, having been recently hired as the new Senior Vice President of Supply Chain.
Current ordering system and how to improve it
Having an inventory model to calculate the optimal order quantity is required in Sapphire Energy. The current ordering system lacks Economic Order Quantity (EOQ) (Eroglu & Ozdemir, 2007). From the calculations in the appendix, it is clear that there is a difference between what is ordered and what should have been ordered. In fact, the difference on the current ordering and what should have been ordered is 6,890 feet of power cable.
For peak effectiveness, the business is required to make order 14 times in an year. Using the current ordering system, the company is making orders for 41,625 feet of cable in every month. This is despite the fact that the optimal number of cables in every month is 34,735 feet. This shows a huge difference in costs amounting to $23.61 annually showing lack of efficiency. The expected time between orders is also is also an indication that there is lack of efficiency. The company has 260 workdays annually based on the 5 normal workdays. This shows that it is possible to attain less than 18.6 days as the time between orders which is more efficient. The current time between orders is 21.7 days which are less efficient as shown in the appendix.
By analysing the current inventory system used by sapphire energy and comparing with the calculated values, it is evident that the current system needs to be improved. It is clear that the current ordering system can be more effective. The current system can be improved by making optimal number of units to be 34,735. This will make it possible to meet the annual demand which is 499,500. The company can change the number of orders that they make in each year to be 15. This will make it possible to have an annual order of 521,025 feet as shown in the appendix. Use of EOQ is very vital especially when looking for minimum costs. This will help the business to come up with the most cost effective quantity to order. To ensure an increase in inventory turns, it is advisable for the energy business portfolio to reduce the order costs. Use of e procurement will help in reducing the costs associated with ordering. In addition, there is need to enhance forecast accuracy which can help in reducing the lead time (Christopher, 2016).
It would be important for the business to adopt a scientific inventory management. This is through formulating a mathematical model that will describe the behaviour of the inventory system, look for an optimal inventory policy and use a computerised information system. This will also make it possible to have optimal order quantities. When the inventory system is optimised, it becomes possible to attain the procurement goal easily. For the inventory, the recommendations are based on enhanced inventory control, managing the storage areas, enhance attitude, and dedicate positions in management of inventory (Bowersox, Closs & Cooper, 2002).
Major global issues in the areas of strategic sourcing
As the new Senior Vice President of supply chain, one has to ensure that AusCotton is strategic in their sourcing. They have to be aware of the global issues that have an impact on their strategic sourcing. The first issue is strategic sourcing and supplier selection. Strategic purchasing is an important part of the firm and should be given priority (Holcomb & Hitt, 2007). The major issue with AusCotton is facing is increase in competition which has led to rise of new firms. There are also issues with their transportation system. When the transportation system is unreliable, there are issues with the length and consistency of delivery. The regions being served by the distribution services face a lot of disruptions. Thus, the firm may have to rethink their current transport arrangement to ensure smooth service to the customers.
Another issue is the existing supplier relationship. With strategic sourcing, issues with the suppliers can lead to loss of market (Ellram, Tate & Billington, 2004). The firm must ensure that their suppliers are competent. This can be attained through use of supplier assessment and selection. This is a step that can eliminate suppliers who have been taking advantage of the firm. It will also be possible to gain quality supplies at a better cost and in a timely manner. This will help in making the business competitive. Another issue in strategic sourcing globally is security risk. This is due to fact that global sourcing exposes firm to political uncertainty in the developing countries. There are also quality risks when sourcing may lead to poor quality hence reputation damage. Lastly, there are intellectual property risks (Stadtler, 2015). This is due to fact that global sourcing exposes the firm propriety knowledge to copycats and thieves. The firm may lose some of their designs as evidenced in the case.
Impacts of less-than-perfect demand forecasts for AusCotton products
Less than perfect demand forecasts, volatile length and costs of transport services used in moving the products from the outsourcing points to distribution centres have a lot of impacts on AusCotton. First, they lead to customer dissatisfaction. This is due to fact that the products are not able to reach the customer in time and in some cases the customer demands are not met. Less than perfect demand forecasts leads to over or underproduction. When there is low production due to poor demand forecasts, it means that the customer needs will not be met. Overproduction and volatile lengths of transport services may lead to product wastage especially if more products are delivered. This is due to oversupply in the market where some of the products are not sold. The fashion industry is volatile and changes fast based on trends. This makes it hard to store products in the inventory for long. In addition, storage of the products in the inventory stores for long leads to high costs of storage. Another impact is disorganisation in a less space. This is due to fact that the poor demand forecast leads to more products being in the stores. There is also loss of money since the business is running in an inefficient manner. The business revenue is lost in inefficient transport and poor demand. There are also issues with the product shortage in case fewer products are delivered to the market. Lastly, the business may find itself having less work for their employees. This is caused by the poor forecasting and issues with the transport system (Ellram, Tate & Billington, 2004).
Strategic sourcing process elements and justification
The elements that are top candidates for improvement at AusCotton are; transport system and demand forecasting and strategic sourcing. Through transport system improvement it will be possible to have time to time delivery irrespective of the method of transport used. There will be updating of the tracking method which will help in detecting the current status of goods being transported. There is need to ensure that there is an accurate demand system. This will ensure that the customer demands are accurately captured. It will be possible to place the right amount of goods for manufacture and shipment.
Accurate demand forecast is required for inventory optimisation. Lastly, there are need for strategic sourcing which is based on planning, evaluating, implementing and controlling activities which are associated with sourcing (Ellram, Tate & Billington, 2004). Through strategic sourcing, it will be possible to have an effective handling of situations associated with supply, competition and varying demands. It will also become possible to select suppliers capable of forming long term strategic partnerships.
Production of illegal merchandise competing with the branded merchandise of AusCotton
If some of the contractors are involved in illegal sourcing, the company must be ready to terminate the partnership. The first step in responding to illegal merchandising by some of contract manufacturers is forming an investigation team. The company should then cancel all contracts with these manufacturers if they are found guilty. It is important to ensure that the firm success is not jeopardised by illegal merchandise hence there is need for a fast action.
As analysed, it is possible to solve the current inefficiencies and challenges experienced in Sapphire Energy and AusCotton. The current inefficiencies and challenges are based on problems with the procurement and supply chain management decisions. Analysis of the current effectiveness of ordering system at the Sapphire energy shows that it is poor based as proved by the calculations. Use of the optimal ordering system can help improve the current system by addressing the inefficiencies. Moreover, AusCotton can address the procurement and supply chain issues that they are currently facing through improving the demand forecasts and coming up with a transport system that is efficient. AusCotton has to implement a strategic sourcing which can help their supply side of the business. In addition, the issue of illegal manufacturing at AusCotton by contract manufactures has to be addressed in time. This can be carried out through carrying out investigations and cancelling contract if contract manufacturers are found guilty.
Bowersox, D. J., Closs, D. J & Cooper, M. B 2002, Supply chain logistics management (Vol. 2). New York, NY., McGraw-Hill.
Christopher, M 2016, Logistics & supply chain management, London, UK., Pearson.
Ellram, L. M., Tate, W. L., & Billington, C. 2004. Understanding and managing the services supply chain. Journal of Supply Chain Management, vol. 40, no. 3, pp. 17-32.
Eroglu, A & Ozdemir, G 2007, An economic order quantity model with defective items and shortages. International journal of production economics, vol. 106, no. 2, pp. 544- 549.
Holcomb, T. R., & Hitt, M. A 2007, Toward a model of strategic outsourcing. Journal of operations management, vol. 25, no. 2, pp. 464-481.
Stadtler, H 2015, Supply chain management: An overview. In Supply chain management and advanced planning, Berlin, Springer.
Evaluate the effectiveness of the current ordering system.
Division requires 499,500 feet or 155,000 metres of cable annually.
Routinely installed during 5 workdays per week
Current cost is: $0.414/foot based on $1.35 per metre
Based on the agreement, division must take 1/12 of its yearly need every month.
Without agreement, lead time would be about 12 weeks.
Supplier requires a minimum of 15,000 feet of wire to be on order
Division has storage space for a maximum of 300,000 feet
Ordering costs of $50 with every shipment
Inventory carrying costs are 10% of purchase price per unit, per year.
Based on the current ordering system, the company is ordering approximately 41,625 feet of cable per month.
Optimal number of units per month: 34,735
Annual cost = (D/Q)*S + (Q/2) * H
Current system of Q = 41,625
Total yearly Costs = $1,461.64
Optimum number units in every order = 34,735
Annual costs = $1,438.03
Difference = $23.61 annually
Expected time between orders
= T + # working days per year / N
5 Normal Workdays * 52 weeks
= 260 workdays annually
Amount of time between orders=
T = 260/14 = 18.6 days which is highly efficient than T = 260/12 = 21.7 days